Prepared by:

Md. Abdus Salam Miah

Head of Microfinance

DAM

On

Contribution of Microfinance

in Rural Poverty Reduction

MICROFINANCETHE TERM MICROFINCE IS USED TO REFER THESMALL- SCALE FINANCIAL SERVICES PROVIDED TOPEOPLE WHO WORK IN AGRICULTURE, FISHINGAND HERDING; WHO OPERATE SMALL OR MICROENTERPRISES; WHO PROVIDE SERVICES; WHOWORK FOR WAGES OR COMMISSIONS ANDOTHERS INDIVIDUALS AND GROUPS AT THE LOCALLEVELS OF DEVELOPING COUNTRIES, BOTH RURALAND URBAN.

Component of Microfinance

MICROFINANCE

SAVINGS

CREDIT

INSURENCE

LEASING

Microfinance Approaches

DAILY SAVINGS SERVICES MONEY LENDERS ROTATING SAVINGS AND CREDIT ASSOCIATION

FIXED TERM ROSCA LOTTERY ROSCA AUCTION ROSCA MERRY- GO – ROUND(NAIROBI) FUND SELF – HELP GROUP IGA GROUP SLA GROUP SOLIDARITY GROUP

DAILY/ FAMALY SAVINGS

Microfinance in Millennium Development Goal (MDG)

1 and 3 by 2015, which are

(i) Eradicate extreme poverty and hunger,

(ii) Promote gender equity and empower women

Key Chooses

Financial Services

Employment Support Services

Extension Services

Skills Development Services

Key CriticismNot Reaching the poorest of the poor

Use loan for Consumptions

MFI field Staff Treated the Clients badly

MFP led to score of microfinance Suicide

MFI put Pressure on staff for Target achievements

Overlapping of the beneficiaries by MFIs

Rigid and inflexible models

Interest rates are too high

Key contribution of Micro Finance

Trend of Rural Poverty: 2000-2010 (%)

* 2000 *2005 *2010

52.6

38.343.8

28.633.1

19.9

0

10

20

30

40

50

60

Poverty Extreme Poverty

Declining Trend of rural poverty has continued till 2010

Annual Growth of Non-Land Asset %

Annual Grow th of Non-Land Assets %

10

13 13

14

0

2

4

6

8

10

12

14

16

Extreme poor Moderate poor Marginally non-poor Well off

Extreme poor Moderate poor Marginally non-poor Well off

Key Contribution

Access to MF reduces the probability of falling in asset transitions

Reduction of the Poverty of Falling in

Asset Transition (%)

7 7.4

2.82.5

6.3

3

Microcredit Remitance Working Member

Poor Non Poor

Increase the Poverty of Moving Up in

Asset Transition (%)

4.55.1

1.81.6

7

3.1

Microcredit Remitance Working Member

Poor Non Poor

Key Contribution:

Change in Non-Land Assets %

0

5

10

15

20

25

Initial

Assets

Change

Over Time

Consumption Borrowers

Non-Borrowers

Productive Borrowers

Coping Strategies by Borrower Category (%)

19 1816

26

31

17

Nocoping Erosive coping Non erosive coping

Borrower Non-Borrower

• Consumption borrowers benefit from better ability to avoid asset

depletion at times of crises.

• Productive borrowers benefit from both avoidance of asset depletion

and creation of new assets.

36

18

9

2

0 5 10 15 20 25 30 35 40

Repayment become difficult

New sources of income made it redundant

Not wanted by any group any more

Interest rate went up to high

Reasons for stop Borrowing (% of those who stopped)

3729

22 18

0

20

40

Poor Extreme Poor

Poverty by Borrower Group

Microcredit borrowers Non-borrowers

52

100

39

100

77

100

Land Asset Non Land Asset Education of HH head

Initial Assets: Borrowers versus Non-Borrowers(%)

Borrowers Non-borrowers

2.5

6.8

16.6 15.4

Microcredit Remitance

Reduction in the Probability of being poor(%)

All Borrowers Productive borrowers

Initial Asset Comparison between Microcredit and

Remittance Receiver:Poor Households

49 4260

100 100 100

Land Asset Non Land Physical

Asset

Education of hh head

Microcredit Receiver Remitance Receiver

Contribution Towards Rural Poverty Reduction %

44.8

16.2

20.3

0

5

10

15

20

25

1

Micro credit

Remittance

Employment oppor

Education of HHs Head

Micro-credit and Poverty The microfinance contributed towards poverty

reduction is about 4 percent.

MF also improved consumption levels of those who remain poor.

Impact of remittance is not much higher – less than 5 per cent

Other factors are more important: e.g, employment opportunities and education.

Cleary, there is much more to poverty reduction than micro-credit, but there is a role fore micro credit as well, especially for the poor.

Summing Up MF Creates scope for mobility in non- land assets, and this

provides a potential “escape route’’ for the poor.

Micro credit Plays an important role in enhancing the scope for accumulation of non-land assets, especially for the poor

Micro-credit promotes asset accumulation for both “Productive borrowers’’ and “consumption borrowers’’.

“ consumption borrowers’. gain because they are better able to avoid depletion of assets at time of crises

‘Productive borrowers' gain additionally by being better able to accumulate assets.

Interest rate is not perceived to be a serious constraint by either group of borrowers.

Micro-credit’s contribution to assets is also reflected in contribution to the reduction of poverty.

MC raises consumption levels of those who stay poor (but dose not improve the consumption of non- poor).

Summing Up What has been the contribution of micro credit toward

poverty reduction in rural Bangladesh? In terms of reduction of poverty rate, the estimate is about 4 percent.

Remittance’s contribution is not much higher, but other factors such as employment opportunities and education are much more important.

Cleary, there is much more to poverty reduction than micro-credit , but there is a role for it as well.

There is no ground for belittling the contribution of micro-credit just as there is no ground for exaggerating its contribution.

effectiveness of MFP:

Focusing mainly on the poor. Currently, about the half the borrowers to the well-off, the analysis consistently reveals that micro-credit does very little good to the well-off.

Offering new products and service delivery models for the poor. The survey shows that almost half of the poor and marginally poor households are left out, but at lest half of them can be counted as potential clients if certain features (such as weekly repayment schedules) are revised.

Microfinance Program,

Dhaka Ahsania Mission